06/01/2011

Bahrain’s economy posted solid results across 2010, with expansion in most sectors, inflation well in hand and a positive outlook going into the new year.

In December, a report by the International Monetary Fund (IMF) estimated GDP growth at 4% in 2010, up on the 2009 figure of 3%. The IMF assessment predicted that this growth would accelerate to 5% in 2011 thanks to higher oil prices and careful management of the economy by the government and the Central Bank of Bahrain (CBB).

However, the IMF report also expressed caution over increased debt levels, stating that these have “highlighted the need to rebalance the fiscal accounts in order to ensure the existence of sufficient fiscal space to respond to external shocks in the future”.

CBB data has shown that the country’s debt to GDP ratio was 27.3% as of the end of the first half of the year, a marked rise on a ratio of 8.5% in the same period of 2008. The increase could be addressed by further fiscal reforms, including reducing subsidies, the IMF said.

Much of the debt is the result of higher state spending to stimulate the economy and strengthen the country’s infrastructure, a move seen as vital if Bahrain is to develop itself as regional financial and logistics centre. Many analysts believe the spending levels are manageable, with ratings agency Fitch saying in December, “Bahrain’s track record of fiscal prudence has created enough fiscal space to accommodate a planned increase in capital spending”.

The financial services sector remains central to the Bahraini economy, and the sector’s resilience was an underlying cause of the kingdom’s solid growth and stability during the global recession.

Though most of the kingdom’s lenders had a solid year – increasing profits, capitalisation and holdings – a few smaller banks recorded operating losses and saw capital adequacy levels fall below those mandated by the CBB. This trend of the big getting bigger and smaller lenders facing difficulties could lead to a round of mergers and acquisitions in the coming year.

The Bahrain Stock Exchange (BSE) broke through a 1600-point barrier in early April before falling to the 1364 mark in the first days of July. However, the market ended the year’s trading at around 1430 points, roughly where it opened at the beginning of 2010.

Better things are predicted for the BSE next year, both in terms of quantity and quality. In late December, the CBB announced plans to transfer management of the exchange to a board composed of representatives from the local financial sector early in the new year, a move many analysts believe will spark greater interest in listing on the bourse and raise trade volume. Currently there are some 50 firms traded on the BSE, though analysts believe this could double in the next few years.

The year closed on a positive note with Fitch rating agency confirming Bahrain’s long-term foreign and local currency Issuer Default Ratings (IDRs) at A and A+ respectively and the outlook for long-term IDRs assessed as stable. This outlook reflected the confidence in the economy as a whole and the banking sector in particular to the stresses from the global downturn and regional property markets over the last two years, said the Fitch report, issued on December 22.

The performance of the economy has been helped by a cooling of inflation, with year on year consumer price increases at just 1.3% as of the end of November, according to data issued by the Central Informatics Organisation in late December.

Oxford Business Group